Dampening equity sentiment could test GBP resilience

BOE comments and UK wages

BoE policymaker Catherine Mann said on Monday that the UK has a long way to go for inflation pressures to be consistent with the central bank's 2% target. However this did not bring around strong gains in sterling on Monday as the expectation around delay in rate cuts is well priced in by markets. In fact, sterling was the worst performer in G10 FX space on Monday, possibly underpinned by a bearish equity sentiment.

Last month, BOE Governor Bailey said there had been “encouraging signs” on the key indicators in the jobs market and services prices, even as he stressed that policymakers are looking for evidence that progress can be sustained.

And the data out today on UK labor market data for the three months ending January showed that labor market is cooling, even as it remains tight by historical standards. Wage growth, excluding bonuses, came in softer than expected at 6.1% YoY (vs. 6.2% exp) in the three months to January. In the same period, Average Earnings growth, including bonuses, eased to 5.6% from the prior reading of 5.8% and expected growth of 5.7%.

The BOE noted at the last meeting that risks from domestic prices and wages were more evenly balanced. Its forecast is for inflation to fall temporarily to 2% in Q2 2024, before picking up in Q3 and Q4, and settling around 2.75% by the end of the year. These wage numbers could easily be a factor underpinning a dovish shift in BOE votes, where two of the members have been voting for a rate hike still at the last meeting. Economic growth concerns will also underpin, especially after the budget boost has remained minimal. UK unemployment rate increased to 3.9% in the three months to January, and consumer confidence slipped back in February, suggesting households are not ready to splash out. Next BOE meeting is on March 21, and February CPI will be released on March 20. Traders could wait for US CPI event risks before more seriously considering a bearish posturing for sterling.

Positioning and technical indicators

The recent COT report for the week ended 5 March 2024 showed that speculators opened 10,300 buy contracts and closed 1,700 short positions in GBP. As a result, the net position of non-commercial traders increased by 12,000 contracts in a week. The long position in GBP is now at its highest since August 2023.

Technical indicators are also signaling that sterling may be getting close to overbought territory. We use RSI and Bollinger Bands to show short-term overbought conditions in the charts below, which could signal near-term, pullback in case of a data miss, especially given the lack of follow-through on Friday’s break to fresh YTD highs. 

The first key support for GBPUSD is at the 1.28 handle, following which strong support is seen at 21DMA at 1.2680. GBP has gained the most against the JPY and CHF year-to-date, followed by AUD. If BOJ pivot expectations continue to grow, GBPJPY could test 100DMA around 186. Likewise, GBPAUD risks slippage towards 100DMA around 1.9150.

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